(b) Earnings in an IRA are tax deferred. The IRS taxes the earnings when they are withdrawn from the account. There is no tax consequence to transfers between IRA custodians. There is no tax liability when a distribution is rolled over between custodians provided the rollover is accomplished within 60 calendar days -- the IRS will impose withholding against the rollover, but this can be refunded upon proper completion of the rollover.

(c) Current regulations allow workers to contribute the lesser of 100% of earned income or $4,000 per year in 2007 ($5,000 for those age 50 or older). In this case, 100% of earned income is less, so she may contribute $2,500.

(c) Although traditional IRAs limit workers older than age 70½ from contributing to their IRA, a Roth IRA permits contributions at any age. Dr. Knight may contribute up to $5,000 to a Roth IRA in 2007 ($4,000 plus $1,000 “catch-up” contribution)

(b) Excess contributions to an IRA are subject to a 6% penalty. In this case, Mr. Brady is entitled to contribute $4,000. The 6% penalty is applied to the excess $1,000 contribution. He must pay a penalty of $60. Current rules require the excess contribution of $1,000 to be withdrawn from the account no later than the tax filing date.

(b) In this example, both spouses have earned income, so both may contribute $4,000 to their IRAs, on their own behalf (i.e., not as spousal IRAs). John is an active participant in a qualified plan while Mary is not. As an "active participant" in a pension plan and earning more than $100,000 jointly (the income threshold in 2007), John's contribution is not tax deductible. Mary, on the other hand, is not an "active participant"; her contribution may be tax-deductible. Deductions for such contributions phase out when joint income is between $150,000 and $160,000. Her contribution is tax deductible since the couple earned less than $150,000.

(a) In this example, both spouses have earned income, so both may contribute $4,000 to their IRAs, on their own behalf (i.e., not as spousal IRAs). John is an active participant in a qualified plan while Mary is not. As an "active participant" in a pension plan and earning more than $100,000 jointly (the income threshold in 2007), John's contribution is not tax deductible. Mary, on the other hand, is not an "active participant"; her contribution may be tax-deductible. Deductions for such contributions phase out when joint income reaches $160,000. Her contribution is not tax deductible since the couple earned more than $160,000 -- the income cutoff for such deductions.

(a) Whether the employee's pension benefits are vested or not is immaterial. This employee is "eligible" for a pension plan -- so he is an "active participant". Since his income exceeds the income threshold any contributions are non-deductible. He may make a contribution of $4,000 to a non-deductible IRA or Roth IRA.

(b) For individual taxpayers covered by a qualified pension plan, the deductibility of IRA contributions is "phased out" at the rate of $.40 for every $1 of earnings above the income threshold ($50,000 in 2007). Jim earned $7,000 more than the $50,000 limit. The non-deductible portion of his contribution is $2,800 ($7,000 x .40). The remaining $1,200 of the contribution is deductible.

b. The withdrawal is fully taxable as ordinary income and subject to a 10% penalty.

c. Only the earnings portion of the withdrawal is taxable as ordinary income.

d. There is no tax consequence to the withdrawal.

(d) This is an example of a rollover — and is a prime example of why the IRS limits the number of rollovers an IRA holder is entitled to. Because the IRA funds were redeposited in an IRA within 60 days of the withdrawal, there is no tax consequence assuming Mr. Hunt has not rolled over the funds in the past year. If they had not been redeposited, Mr. Hunt would have to pay taxes on the withdrawal, plus a penalty for early withdrawal. [Needless to say, this type of activity should not be recommended to clients.]

d. federal law requires rollover of lump sum distributions into an IRA

(b) Rolling lump sum distributions into an IRA is a way of delaying the tax bite on the pension distribution. Taxes will be owed when money is withdrawn, which must begin no later than age 70½. Rollovers do not "eliminate" taxes. By placing the pension plan assets in the IRA, they will not generate current income for the IRA holder. There is no law which requires rollovers of pension plan assets.

d. use income averaging methods to calculate the taxes owed on distribution

(c) To avoid taxes on the pension plan distribution, Mr. Franklin should roll the distribution into an IRA. Since he is seeking another job with retirement benefits, he may wish to eventually move the "old pension" money to the new employer's plan. If the lump sum is commingled with other IRA assets (such as the account established with deductible contributions), the pension money can not be subsequently moved into the new pension plan. The best course of action is to hold that money in a separate IRA account -- a Conduit IRA.

(c) Mutual funds provide the most convenient investment in an self-directed IRA. Almost 40% of IRA investors own at least one stock fund, 12% are invested in bond funds, and 27% hold money market funds in their IRAs. Certificates of deposit are typically held in bank IRAs.

(d) All of the choices presented are suitable for conservative investors. However, municipal bond funds would be poor choice as an IRA investment. In an IRA, the earnings are tax deferred. The lower, tax free yields of municipal bonds is a disadvantage for an IRA investor. Tax-advantaged investments, such as municipal bonds are best held in the individual's "regular" accounts -- not an IRA.

(d) Fixed income securities, such as bonds (both interest paying and zero coupon), are subject to inflation risk. Stocks, with their potential for appreciation, provide a better inflation hedge than bonds. Growth stocks have greater appreciation potential than utility stocks.

(d) Taxes on any earnings in the account, whether from dividends, interest or capital gains, are deferred until withdrawal from the account. There is no requirement thatwithdrawal begin at age 59½ , or at retirement. All earnings in the account — dividends, interest or capital gains — will be taxed at the ordinary tax rate (i.e., the capital gains tax rate does not apply in an IRA)

(c) Withdrawals prior to age 59½ are subject to a 10% penalty in addition to the taxes owed on the amount withdrawn. The penalty can be avoided in the event of death or disability. There is no exemption for "financial hardship". Mr., Johnson owes taxes of $1,400 (28% of $5,000) plus a penalty of $500 (10% of $5,000).

(d) Withdrawals prior to age 59½ are subject to a 10% penalty in addition to the taxes owed on the amount withdrawn. The penalty can be avoided in the event of death or disability. The penalty may also be avoided if the distributions are taken in "substantially equal periodic payments". There is no exception for "financial hardship".

(c) Mandatory withdrawals are required once an IRA holder reaches age 70½ . Failure to take the required amount results in a 50% penalty. The amount of the required annual distribution is found by dividing the value of the account (as of January 1st of the year) by the life expectancy of the holder (based on age as of December 31st). In this case the woman must withdraw $3,950 ($39,500 divided by 10.0 years) to avoid the 50% penalty. She will, of course, pay taxes on any amounts withdrawn.

(d) The IRS requires the first mandatory withdrawal from an IRA to be taken no later than April 1st of the year following the year in which the account holder reaches age 70½ . In this case, Mrs. Thompson reaches age 70½ in 2007 (her 70th birthday was August 1, 2006). She must begin withdrawals no later than April 1st of the following year — 2008.

(b) The man is required to withdraw $5,000 from the account ($66,000 value divided by 13.2 year life expectancy). Since he withdrew only $3,000, he is subject to the 50% penalty on the $2,000 undistributed amount — the "excess accumulation". His penalty is $1,000 (50% of $2,000).

(d) While persons over age 70½ may not establish or contribute to a traditional IRA, these rules do not apply to Roth IRAs. Persons of any age, with earned income, may establish and contribute to a Roth IRA. Persons of all ages may roll assets over from an existing plan into traditional and Roth IRAs.

(d) Mr. Able and Mr.Charlie could both contribute to either a traditional or Roth IRA. Mr. Charlie’s contributions to a traditional IRA could be deducted on his tax return, while Mr. Able's is not deductible. Ms. Delta and Ms. Bravo are too old to contribute to a traditional IRA. Ms. Bravo could contribute to a Roth IRA. Ms. Delta could not as she earned more than $110,000 -- the income cutoff for single taxpayer Roth IRAs.

(b) The IRS levies a 6% penalty for contributions made in excess of the permissible levels (100% of income up to $4,000) and for contributions made to a Roth IRA by those whose income exceed the permissible levels ($110,000 for single taxpayers and $160,000 for joint taxpayers).

b. the penalty applies each year the contribution remains in the account

c. the penalty applies until the excess is withdrawn

d. the penalty applies until the contributor underfunds future contributions to "correct" the excess

(a) The penalty on excess contributions in a Roth IRA is cumulative -- it applies for each year the excess remains in the account. Underfunding future contributions is one way to correct the situation, as is simply withdrawing the excess.

(a) If the contributions did not remain in the Roth IRA for five "tax years" or are taken before age 59½, death, disability, etc., the distribution is "nonqualified". Nonqualified distributions are considered tax-free return of contributions first, then taxable earnings.

c. but must pay tax as though the traditional IRA assets were distributed, including a 10% penalty on premature withdrawals

d. but must pay tax as though the traditional IRA assets were distributed, but no 10% penalty for premature withdrawals

(d) To convert a traditional IRA into a Roth, the value of the account being converted is taxed as ordinary income — but there is no premature distribution penalty on such conversions. Conversions can occur through a rollover, a direct trustee-to-trustee transfer or by simply notifying the trustee of the conversion. 20% withholding applies in the case of rollovers, but not transfers or trustee notification.

(d) Any employer may establish a SEP. Employees may not establish a SEP. To establish a SIMPLE IRA plan, the employer may not have more than 100 employees — but this limitation does not apply to SEP-IRAs.

(d) The employer must cover all employees who are 21 or older, earns at least $300 per year (adjusted for inflation, $500 in 2007) and have worked for the employer for any three of the past five years. The employer may make the eligibility requirements less stringent. The $5,000 limit applies to SIMPLE IRAs, not SEPs.

(d) Model SEPs require an IRA for each participating employee. These plans may not be integrated with Social Security, nor may they be established if the employer has ever maintained a defined benefit plan or current maintain other qualified plans.

(a) Key personnel are any employees who serve as officers and earn $130,000 or more annually (adjusted for inflation, $145,000 in 2007); or those owners of the employer having a 5+% ownership interest; or those owning 1+% of the employer and earning more than $150,000. Choice III is not an owner or officer, and therefore is not a "key" employee.

c. make a mandatory contribution of 3% of each non-key employee's compensation

d. terminate the plan

(c) When qualified plans are top-heavy, they typically require an accelerated vesting schedule, Since contributions to a SEP-IRA are 100% immediately vested, they can't be accelerated. In top-heavy SEP plans, the employer must make a contribution of at least 3% for all non-key employees.

c. 6% of an employee's first $15,000 of compensation and 3% of compensation over $15,000

d. 6% of an employee's compensation in excess of $25,000

(d) Flat contribution formulas, such as a fixed dollar amount or fixed percentage of compensation are allowed, as are formulas in which the contribution level decreases as income increases. Formulas which have lower contribution levels for lower levels of compensation are discriminatory and therefore prohibited.

(c) Self-employed compensation is measured after all relevant business deductions have been made i.e., net income. The tax code requires the self-employed to deduct their contributions to the SEP and one-half of the self-employment tax as part of that calculation.

(a) Excess contributions that are withdrawn from the account are included in the employee's taxable income for that year, but there are no penalties. If not corrected by the employee's tax filing date (usually April 15th) the excess contributions are subject to a 6% penalty for each year they remain in the account.

(a) Contributions to a SEP-IRA are usually made for employees who have reached age 21. Since funds may be withdrawn immediately (there is no deferred vesting allowed in a SEP), withdrawals can begin as soon as they are deposited in the account.

(a) Employers must notify employees of their right to make SIMPLE plan deferrals, and the amount of the employer's contribution, before the election period. The election period must extend over at least 60 days.

III. contribute no more than 2% of the employee's compensation as a non-elective contribution

IV. contribute 2% of the employee's compensation as a non-elective contribution

a. I or III

b. I or IV

c. II or III

d. II or IV

(c) Employers must either match employee contributions up to 3% of compensation, to contribute 2% as a non-elective contribution. Under certain circumstances, employers may choose to match SIMPLE IRA deferrals up to 1%, instead of 3%.

(b) SIMPLE IRAs allow employers to ignore the non- discrimination and top heavy rules. SIMPLE plans must be in writing, require employer contributions and provide for 100% immediate vesting (which is more strict than allowed under ERISA).

c. only those employees not covered by a collective bargaining agreement

d. only those employees who have one year of service and are age 21 or older

(a) When counting employees for purposes of the "100 employee rule", all employees must be counted -- even those not eligible to participate. If the employer controls more than one business all employees of all businesses must be counted.

b. only those "eligible" employees who expect to earn at least $5,000 from the employer this year

c. only those "eligible" employees who earned at least $5,000 from the employer in any of the past two years

d. only those "eligible" employees who expect to earn at least $5,000 from the employer this year and who earned at least $5,000 from the employer in any of the past two years

(d) Employers may exclude certain employees from participating in the plan (i.e., contributing to the plan). Employers may exclude employees who are not expected to earn $5,000 this year and those who have not earned $5,000 in any of the prior two years (these need not be consecutive years).